A Guide for Investing in Rental Property

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A Guide for Investing in Rental Property
We are one of the largest single-family home
property management companies in Michigan. We
have been in business since 1989, and we
currently manage thousands of properties
primarily in Oakland, Macomb, Wayne, Washtenaw,
Genesee, Livingston and St. Clair Counties. We
are your neighbors! North Bloomfield Properties
has always been locally owned and operated.
Because of that we can offer personal service
and local knowledge that no out of state
franchise company could ever match. We listen to
you about your needs, concerns and expectations
with regard to your property. Then we pride
ourselves in locating the best possible tenants
for your property, then providing them with top
notch, prompt, professional service. Whether you
have a single home, condo or even a large
apartment complex, our maintenance, legal and
accounting teams work to provide the best
possible service at a very competitive
price. Pick a great location For long-term
equity growth, a residential rental property in a
good location is key.
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"Look for proximity to major roads, public
transportation, and most importantly, schools,"
says Abhi Golhar, host of Real Estate Deal Talk
in Atlanta. Research rents in the area you want
to pursue, both in as-is condition and with
repairs or improvements, adds Chris Taylor, a
broker with Advantage Real Estate in Boston. "I
find the biggest mistake investors make is
overestimating what their property is worth,
which results in vacancies and below-market
rents," Taylor says. You also want to get inside
the minds of your audience If you are in a
college town, for example, it's important to
know how students think, the maximum distance
they're willing to be from campus and the
locations they consider ideal, Taylor says, so
you can buy a property that will be in high
demand. Start small Start with an affordable
initial investment like a single unit or a duplex
versus a whole apartment building, says Ryan
Coon, founder of Rentalutions, an online property
management platform for do-it-yourself landlords.
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"That way if things go south and you are unable
to afford to pay for mortgage or maintenance,
you are not running the risk of going bankrupt,"
he says. Because you're just getting started,
avoid properties needing significant repairs,
since these could cause you to overextend
yourself. Consider using a property manager and
ask friends for referrals for attorneys,
contractors and other real estate professionals
who can help you and will become valuable
contacts over time, Coon says. Run the numbers,
then run them again It's important to treat each
rental property like its own business to serve
as a good investment.
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"The most important consideration for prospective
landlords is to accurately estimate rental
income and the costs associated with leasing,"
says Lucas Machado, president of House Heroes, a
South Florida real estate investment company.
"Until a landlord has a precise grip on these
issues, they risk owning a property that rather
than a profitable investment is a net loss
every month." Betting on appreciation alone is
not a good idea. "Rental purchases should have
positive cash flow and good rate of return,"
Machado says. That could be anywhere from 8 to
15 percent in a residential market. Investment
real estate is often valued by its
capitalization (cap) rate, which is computed by
taking the net operating income divided by the
going cap rate in the neighborhood to come to an
appropriate price. Your monthly expenses will
include the mortgage or debt service, taxes,
insurance, lawn and pool maintenance, property
management (optional) and insurance. At least 20
percent down payment will likely be required if
financing the purchase.
Vacancy, turnover and eviction are realities of
leasing any property, so wise landlords must
assume at least a month's rent loss annually,
Machado said. Don't over-improve the property To
keep your cash flow at optimal levels, don't
spend too much on upgrades for a rental property
that will likely need maintenance and repairs
during turnovers anyway.
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"The best advice I ever got was to imagine a box
of minimum standards and never go outside that,"
Nayar says. This keeps your monthly rent at an
appropriate ratio of about 1.2 to 1.4 times the
monthly cost of the property, with plenty of
cushion. Because maintenance is also a given when
owning rental property, Nayar buys a home
warranty that costs 500 per year to better
spread out the cost of repairs. "I give the
information to the tenant and let them know they
will have to pay a 35 deductible directly to
the company every time they need something done,"
Nayar said. "You will be shocked how much this
takes off the plate in terms of maintenance. It's
important you are upfront with tenants about
this and set this expectation." Consider what
type of maintenance is required based on the type
of property you purchase. For a single-family
home, the landlord is generally responsible for
things like lawn mowing and snow removal, but if
you buy a condo or townhouse, that maintenance is
included in the condo fee, resulting in a more
hands-off process, Taylor says. Choose tenants
wisely Dealing with tenants can be stressful,
but it doesn't have to be. "A final critical
evaluation is if the buyer intends to manage the
rental herself or himself. Are you prepared to
thoroughly screen tenant applicants, and assert
yourself in difficult tenant situations?" says
Elizabeth Gibson, chief content officer for
ezLandlordForms.com.
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"A landlord needs thick skin," she says. "If
you're likely to waver with applicants who are
not qualified, or with late rent payments and
other lease violations, you may need to hire an
agent property manager to protect your
investment." Tenant income should be at least
three times the rent and verified by having their
employer sign a form, Nayar says, which will
hopefully keep vacancies and eviction losses to
a minimum. Top Large-Cap REITs to Buy
Stock Name Dividend Yield 1 Year Return
SBA Communications Corporation SBAC N/A 28.89
Equinix Inc EQIX 1.62 26.05
American Tower Corp AMT 1.79 25.39
Annaly Capital Management Inc NLY 9.64 24.56
Digital Realty Trust Inc DLR 3.16 21.68
Essex Property Trust ESS 2.64 21.39
Prologis Inc PLD 2.85 17.84
Mid-America Apartment Communities IncMAA 3.26 16.91
UDR Inc UDR 2.74 12.57
Alexandria Real Estate Equities Inc ARE 2.87 12.49